Odyssey Marine Has Sails Set

Fair seas are ahead for Odyssey Marine (NASDAQ:OMEX), the undersea treasure hunter. After the successful salvage of the SS Republic in 2003, the company found and salvaged 17 tons of silver coins from a shipwreck the courts later determined to be a Spanish warship. A federal appeals court held that US law and treaties provide for indefinite Spanish ownership of their sunken warships and cargo. The coins were then transferred to Spain.

A new business plan was adopted whereby the identity of a shipwreck would be determined and agreements reached with potential claimants before salvage was commenced.

The company has located a number of shipwrecks of UK-flagged ships, and agreements have been reached as to the sharing of salvaged articles. Generally, OMEX is responsible for costs of salvage operations until sunken cargo is recovered. The value of recovered cargo goes first to pay expenses of salvage, then is split 80% for OMEX and 20% for UK. The value of archaeological items, such as bronze cannon, is split 50-50.

Records showed that two torpedoed freighters carried large quantities of silver, and were on the ocean bottom west of Ireland under 15,000 feet of water. OMEX located these ships and made plans for salvaging the silver.

Chances of success were perceived to be poor, and with 74 million OMEX shares outstanding, 14 million were sold short. This was an understandable strategy since failure would probably have resulted in bankruptcy. However, OMEX succeeded.

They recovered and have sent to a UK refiner 48 tons of silver ingots. A sampling of the ingots shows a value of about US $842,000 per ton, or $40 million for silver delivered to date.

1 ton = 32000 oz. x 0.92 silver = 29440 oz x $28/oz =$853,760.

1 ton = 32000 oz x 0.00035 gold = 11.2 oz x $1650/oz = $18,480.

48 tons x $872,240 = $41,867,520.

Records show the probability of another 60+ tons on SS Gairsoppa, with the possibility of another 100 tons. The second freighter sunk nearby, SS Mantola, carried 18 tons of silver, and is next in line for salvage.

OMEX has about $20 million in debt, about $10 million of which is being used for these salvage operations. The silver already recovered is more than enough to pay the expense of salvage and the debt, with a nice chunk left over. Additional silver recovered will be virtually all profit with 80% going to OMEX.

OMEX has a market cap around $280 million. Should salvage of the remaining 60+ tons of silver be successful, the company will have either earnings or an increase in book value of about $60 million in the next six weeks. If the additional 100 tons shown by some records is recovered, the increase could be another $75 million. And it is possible the price of silver is starting up again.

Did I mention the 14 million shares sold short? With average trading volume of 500,000 shares daily, it is going to be difficult to cover short sales. Since OMEX stock has been priced under $4 since Feb. 2009, except for two brief spikes, virtually every remaining short seller of the past 3-1/2 years now has a loss.

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Well-financed short-sellers can be expected to originate "dirty tricks" before acquiescing to a major loss. At the least, there should now be numerous stop-loss orders below the recent trading range bottom near $3.60, so an attempt at a quick push downward to trigger these should be anticipated. A derogatory article or two in the mainstream media is also possible. Of course, should the Seabed Worker return to port with less than 60 tons of silver, the stock will probably take a legitimate hit. Ditto should silver fall below $25 per ounce.

OMEX has other projects, including the HMS Victory, sunk in 1744. They recently completed "non-disturbance" site studies and are awaiting approval of the next step, artifact recovery. Contemporary newspaper accounts speculated that four tons of gold coins were aboard. Should they be recovered, as an example, what would be the worth of a variety of 500,000 quarter ounce gold coins, all older than 270 years?

OMEX is probably the world's premier undersea salvage company. They appear to have developed a successful business plan. They say they have located "hundreds" of shipwrecks and are also involved in undersea mineral mining. This company is worth a look.

Disclosure: I am long OMEX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.